Only until they change their minds

By now, some of you have heard about the U.S. Supreme Court’s antitrust ruling yesterday on resale price maintenance — I know, because you’ve e-mailed me! I haven’t downloaded and read the decision yet, but the court changed the law and, as this article suggests, lifted the ban on distributors fixing minimum prices for their retailers. (No, the case had nothing to do with yarn; it was about handbags.)

This doesn’t mean that all resale price maintenance is legal. What the court did (in a 5-4 decision) was abolish the rule that resale price maintenance is per se illegal, because sometimes fixing minimum prices could actually promote competition (this is not the same as conspiring among competitors to fix a minimum price; this is just about a distributor telling its retailers to sell at a fixed price). Instead, each case of resale price maintenance must be evaluated on a case-by-case basis to determine its anticompetitive effects. In the case at bar, the fixed minimum price gave small businesses the opportunity to compete on customer service against discount chains (whom, I assume, did not sell the exact same high-quality product).

You can imagine that distributors will probably be quite pleased with this. At first blush, I can see that the argument makes sense with goods that are carried by large and small retailers alike and that are, as far as the consumer is concerned, non-substitutable. Consider what happened to small, independent book stores. You don’t hear readers saying “I’d like to read the Discworld series, but I don’t want to spend all that money on the books. Can anyone recommend a cheaper substitute that has some sort of special, unseen school for wizards?”* Someone’s going to buy the book, or they’re not; if multiple retailers want to compete, they have to carry the exact same book, not some substitute book about wizards. Considering the number of small shops that have folded, perhaps customers do not attribute a value to customer service that’s equivalent to the price difference between a local bookshop and the local big box store that can afford to discount the retail price. A fixed minimum price might have helped those shops.

One the other hand, it makes less sense when the product is substitutable with goods of similar quality. To bring this back into our context, knitters look for substitute yarns all the time, so even yarns from different suppliers compete on price and quality. Sure, some yarns are unique, but there’s often something just as good, depending on the knitter’s standards. A yarn shop doesn’t need to compete with exactly the same products; it can choose to carry Cascade 220 or Ella Rae Classic, and make its customers understand that the yarns are perfectly substitutable.** If a yarn is competing against other yarns sold by other retailers, then insisting on a minimum retail price arguably harms competition. If a yarn was only competing against itself, because it was the only pure silk yarn spun with pure gold beads shaped like Elvis that was rated for use in -40°C weather,*** then the competition would be between shops selling the same item, and a minimum price may make sense.****

Interestingly, I’m not certain where patterns fit into this. Lots of people will substitute one pattern for another, because they just want a sock with a certain type of heel, or a raglan with some kind of cable decoration, but they don’t want to pay for a pattern, or they have a low ceiling on the price they’re willing to pay. Some patterns, though, are less substitutable than others.

Off to digest.

* Pretend we don’t have libraries.
** Yes, I know some people might threaten a lawsuit over claims that certain yarns are substitutable with certain other yarns. This is the gateway to the fascinating intersection of trademark and antitrust law; trademarks and other intellectual property rights are a form of permissible legal monopoly, contrary to the basic premise that monopolies are bad; businesses are within their rights to legitimately exercise their IP rights to compete against others. Identifying when wielding IP rights becomes an anticompetitive abuse of those rights is a fun question.
*** Don’t get any ideas.
**** I am only making a crazy hypothesis; I am not saying that producing pure silk yarn spun with pure gold beads shaped like Elvis that was rated for use in -40°C weather will keep you on the right side of any country’s antitrust laws.

6 Responses to Only until they change their minds

I can’t believe I read this whole post and the comments, and understood more than I didn’t. That said,I can’t believe customer service is important to that many people. If it was, you-know-who-Mart (among others) would close their doors tomorrow. (I refuse to shop there unless there is no alternative.) And yeah, they’re more in the market of dog food and stuff-we-need-to-be-getting-rid-of-instead-of-buying-more, but it’s just one example.

There is no customer service comparable to my favorite LYS, and hey – an hour with Linda to sort out your project problems or for private lessons is only 10 bucks! (On the other hand, my backup LYS carries the needles I prefer, so I go there for those, but they forgot to stock up on Southern Hospitality, and their classes are waaay more expensive.)

Some yarn suppliers do impose certain minimum conditions, such as minimum orders, a retail location, minimum hours of operation, etc. so there are some obligations for carrying some brands. Some, notoriously not so.
Also – if one believes in the free market, then the good service slackers will lose enough business to not meet minimum order requirements (eventually). And in this day of instant communication, customers may even leapfrog the retailer and complain to the yarn company directly about the inadequate service at the retailer. Those companies that actually care about their brand could act.

I’d like to think this could help the full-service LYS – unclear though. I do know that I’m sick and tired of seeing cut-rate yarn shops open up down the road from LYS’s in residental homes, husband’s office building, or eBay, sell all their friends yarn at wholesale, open up for business a couple of hours a week (maybe) and then hear on the internet about all the wonderful deals. I just don’t want to be the one saying “I told you so” in 5 years when no one can find in-person help with their knitting. Margins are thin out there!

Yeah, Anima, you’re right: fixed minimum retail prices would help those smaller retailers, but it isn’t a logical choice for book publishers in the scenario you describe, because those retailers are only looking for bargains with respect to price.

The question is, then, what makes it a logical choice for other suppliers in different circumstances? If the supplier had an infinite supply of goods, then they’d be in the same position: no incentive to set a fixed minimum price. I keep winding up at the conclusion that the extra money allows the retailer to compete with good service, but I still have a hard time with it: if the good is also being sold by a large retailer, with a fixed minimum that discounter’s marginal cost of providing customer service is going to be lower than the small business’s cost. How is the small business competing, then? If the good is only being sold by small retailers, then the customer service argument may work there… except you don’t need a minimum retail price to protect competition, because they’re all small businesses and allowing the market to set the retail price will not lessen competition.

This brings us to the argument that fixed minimum retail prices enhance and protect the brands sold by the retailer, because the retailer can afford to provide good customer service. That doesn’t make sense to me unless the supplier is also contractually requiring the retailer to meet a minimum level of customer service, because without that obligation you’ve got the potential for some retailers to take a free ride on the customer service of others, which according to this logic would detract from the brand. How many suppliers impose this kind of requirement in the yarn industry?

You are right on with your book publishing analogy, except for one factor: the manufacturers/distributors must elect to put the minimum price requirement into place. When various book retailers such as Walmart, Costco, and even Amazon (see Harry Potter) etc. buy so many copies, in order to use them as loss leaders or imply a perceived store-wide savings, then the publishers would be shooting themselves in the foot to institute such a policy. Books would then become far less attractive to those retailers, and they would possibly not carry books at all.

But yes, it would be nice for the independents, in an ideal world… and maybe we’d have more of them around.

Still haven’t read it, but I found myself wondering: what happens when the cost of providing enhanced customer service (for the purpose of competition) is less than the difference between the supplier-fixed minimum price and a sustainable, competitive price? Does the fixed price become anticompetitive then? If a yarn retailer discounted her yarn by about 15%, and the manufacturer’s “suggested” retail price was $35, that’s undercutting the MSRP by $5.25. How could the cost of providing premium customer service cost $5.25 per skein of yarn? For a sweater, that’s maybe $30-50; could the cost of an employee plus overhead attributable to the transaction be that much?

In fact, that sounds like an hour-long private knitting lesson. I know that shops often provide help to their own customers, but few of them go to that extreme.